Revenue vs. Profit (Definition, Types and Comparison)
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Understanding revenue and profit are essential for successfully running a business. Revenue is the total amount of income a company generates through its primary business activities. Profit, also known as the bottom line or net profit, is the amount that remains after the calculation of debts, expenses, taxes and other deductions. In this article, we discuss the difference between the two and explain why both play an important role in the financial outlook of a company.
Revenue vs. profit
While comparing revenue vs. profit, it's beneficial to examine their definitions and examples:
What is revenue?
Revenue is the total amount of money a company earns through sales and services. It includes any discounts or deductions from returned products. This figure refers to the top line, since it's the first number entered on the balance sheet from which there are deductions. Given that it's income a business collects as part of routine business operations, revenue is also known as sales.
For example, before deducting any expenditures, a shoe retailer's revenue is the money they make from selling shoes. If a retailer has income through investments or a subsidiary company's revenue, it may not qualify to be the retailer's revenue. This is because income is not from shoe sales. Businesses calculate additional sources of revenue and different types of costs individually. For accounting and tax purposes, organisations split non-primary business activity from the top line of the balance sheet and give it an individual entry. If it may cause problems later during an audit, a reconciliation is required.
What is profit?
Profit, also known as the bottom line, because of its position at the bottom of the balance sheet, is the amount that is left over once the company deducts expenses, costs, taxes, rent or mortgage, payroll, utilities and any other operating expenses from revenue. The final number at the bottom of the sheet is the net profit that the business claims. The company then uses its profits to reinvest or to pay out dividends. Profits are important when attempting to calculate the fiscal security of a business. It summarises the financial success of an enterprise.
Balance sheets follow a certain structure, where there are calculations to provide an overview of the expenses and profit a business possesses. The number on the bottom line shows how profitable a business has been for any given time period. As the primary goal of a business is to make money, a business can gauge its performance by determining revenues and reducing costs to reach a profit.
Types of revenue calculations
There are two methods to calculate revenue and expenses that businesses commonly use. These methods are:
In accrual accounting, businesses record revenue and cost regardless of when a person deposits or pays them money. For example, rather than recording income for a monthly salary, you might record revenue after you complete a project. This is a more popular approach than the cash accounting method.
This method involves only taking into account costs and payments after transactions and the deposition of funds. It's relatively straightforward to maintain cash accounting in comparison to accrual accounting. This is why many small firms choose to adopt a cash-based form of accounting.
Operating vs. non-reporting revenue
When preparing a business's income statement, it's a smart accounting practice to separate operational and non-operating costs. Look at your operational revenue if you want to compare the business's revenue from one period to the next. Given that non-operating revenue is irregular, this provides you with a better understanding of whether the firm's operations are expanding.
Operating revenue: Operating revenue refers to the revenue that a company earns through its principal or core activity.
Non-operating revenue: The money a company earns through operations that are not part of its primary business refers to non-operating revenue. University research grants, for example, are non-operating income since they're not a part of the primary company revenue source.
A company's financial health depends on its cash flow. Though having a variety of expenditures is unavoidable, having a higher overall profit or total income implies you have the resources that may help keep a business running. If you're working in sales, calculating your overall revenue and recognising the various categories of revenue is crucial.
Most businesses compute revenue consistently. Companies frequently report net revenue, which removes items like discounts and refunds. You can calculate total revenue with either of the following formulas:
Revenue = Number of units sold x average unit price
Revenue = Number of clients x average service price
Types of profit
Gross profit, operational profit and net profit are the three types of profit. Here's a description of each:
The cost of goods sold (COGS) subtracted from total sales is gross profit. Variable expenses are those that are specific to each product, such as assembly personnel, materials, gasoline and fixed expenditures, like plants and equipment. This doesn't include the operational expenditure of the human resources department.
You can also use this metric to track an additional metric, known as gross profit margin. This metric indicates how profitable and efficient your production mechanisms are. You can track it over a specific timeframe to understand whether a business has grown it's profits, or whether it's margins have regressed during that time period. Typically, you denote profit margins as a percentage to facilitate comparison.
This includes both variable and fixed costs. It's also known as EBITDA, which stands for earnings before interest, tax, depreciation, amortisation. Companies widely utilise this statistic, especially service organisations without goods. This metric doesn't account for transactions that happen in relation to a company's debt burden.
For example, if a company secures a high volume credit arrangement from a financial institution, it may be able to channel those resources towards running its operations and securing a high operating profit consistently over a period of time. It may even expand the scale of its operations and significantly increase its operating profit with each financial quarter or year that passes. Depending on the terms of the loan arrangement and the size of repayments due, the company may still suffer net losses over that same time period.
The entire profit that a company makes after all deductions is its net profit. It's the most accurate indicator of how much money a company makes. The profit margin that businesses calculate includes all three forms of profit, namely gross, operational and net profit. Depending on how companies adjust and optimise their operational expenses, they may generate a net profit or loss after deductions and expenses.
Profit margins affect how much money you make and reflect your company's overall financial health. By accounting for the expenses of manufacturing and selling things, profit margins indicate a firm's or business activity's relative profitability. The higher the profit margin, the greater the benefit for the company. A high gross margin in combination with a low net margin may indicate that there are areas for improvement and scope for optimisation. Profit margins vary depending on the type of product, manufacturing costs and maximum retail price. It allows you to determine profit per product unit or service.
Profitability measures are significant for business owners because they reveal areas of weakness in the operational model and allow for year-to-year performance comparison. The profitability of a corporation has significant consequences for its future growth and investment possibilities. This form of financial research helps management and investors assess how a firm compares to its competitors.
Examples of profit types
Gross profit is the deduction of costs from revenue. For example, suppose a corporation sells $50,000 in items and incurs $35,000 in expenses, then its gross profit is $15,000. Operating profit is the subtraction of operating expenditures from gross profit. If the same corporation has $5,000 in operational expenditures, you can subtract this from the gross profit to get an operating profit of $10,000. The third degree of profitability is the net profit, or the money left over after compensation of taxes and loan interest. If taxes amount to $1,000 and interest amounts to $300, the net profit is $8,700.
These three degrees of profitability correspond to the three major types of profit. The significance of each metric is unique and since companies use them as part of standard practice, there is no inconsistency in their comprehension. Gross profit exists at the most fundamental level, followed by operating profit in the middle. Lastly, net profit at the bottom is the greatest form of profit since you obtain it after subtracting all expenditures, taxes and interest.
Explore more articles
- How To Write a Business Letter (With Tips and an Example)
- How To Write a Staff Development Plan (With Example)
- How To Improve Work Performance: 16 Tips To Help You
- What Is the S Curve in Project Management? And How to Use It
- What Does Media Outreach Involve and Why Is It Important?
- How To Write a Professional Biography About Yourself
- How to Become a Technology Consultant (With Example CV)
- 8 Cleaner Skills and How to Develop Them (With FAQs)
- Learn How To Ask a Professor for a Letter of Recommendation
- 18 Content Writer Skills and How To Highlight Them
- How to Take a Year Off Work (With Steps and Benefits)
- 10 Important Negotiation Skills: Examples and Tips